Comparisons to Paris can be trite, but in the case of Budapest—often called the Paris of the East—the analogy fits. The Hungarian capital is filled with marvelous architecture, from medieval to Baroque to Art Nouveau; grand tree-lined boulevards such as the elegant Andrássy út, which is often likened to the Champs-Élysées; and majestic bridges that link the two distinct halves of the city. One of those crossings, the Margaret Bridge, is the work of Gustav Eiffel's engineering firm, as is the impressive glass-fronted Nyugati train station. And Budapest has often been cast as a stand-in for the City of Light in movies, most recently in the Robert Pattinson–Uma Thurman film rendition of Guy de Maupassant's Bel Ami, shot on the city's streets this spring.

"Budapest has an old-school chic that's genuine," says New York jewelry designer Amedeo Scognamiglio. "The museums are incredible. You can really feel the grandeur of an old imperial city." After several visits, the Naples-born Scognamiglio became so smitten with the imposing architecture and continental vibe that he decided to purchase a pied-à-terre here. "What I love is the mix of cultures," he adds, "the fact that you can feel the Ottoman Empire as well as the Hapsburg presence."

Indeed, the Turks' 150-year occupation left behind mosques, hammams (the restored 16th-century Király Baths, with their distinctive copper dome, are still popular), and an enduring coffee culture. But it's the Hapsburgs who conjured the indelible imperial look that still dominates the skyline, from Buda Castle to the Chain Bridge to the butter-color Szechenyi Baths in City Park. The fashionable and free-spirited 19th-century Hapsburg Empress Elisabeth, the Princess Diana of her day, still looms large in the Hungarian imagination. Portraits of the sensationally popular empress, known as Sisi, fill souvenir shops, almost always with a constellation of diamond stars cascading down her long brown locks.

Fashion designer Adrienne Vittadini, who was born near Budapest and fled the city with her family after the failed 1956 uprising, returns every year to visit relatives and soak up the atmosphere at the stunning Four Seasons Hotel Gresham Palace, a sumptuous Art Nouveau building at the foot of the Chain Bridge—and to shop. Vittadini loves to stroll the antiques district along leafy Falk Miksa utca and Váci utca near the Parliament, where high-end retailers and galleries like Bardoni, Pintér Antik, and Montparnasse have congregated. "You can get very good buys on Biedermeier furniture in Budapest. I bought a charming bench and a table for my Milan apartment there," she says. "And I love the vintage shops where they sell traditional Hungarian folk costumes and handprinted blue-and-white textiles." The designer also wanders the stalls at the sprawling Ecseri Piac flea market on the outskirts of town in search of silver boxes, Russian icons, works of art, and Art Nouveau walking sticks.

More than 20 years after the fall of Communism, Budapest has recaptured some of the energy of its heyday as an artistic, literary, and cultural capital (alongside Vienna) of the old Austro-Hungarian Empire. Its historic façades are once again gleaming, and parks and squares are neatly tended after decades of neglect. In the past two years, Andrássy út has seen the opening of Emporio Armani, Burberry, and Dolce & Gabbana boutiques, joining other recent arrivals Gucci and Louis Vuitton. There's construction everywhere—and each summer pioneering young people take over vacant old buildings and turn them into temporary open-air "ruin pubs" before the bulldozers arrive. The streets are bustling, especially in good weather, when plazas like Erzsébet tér fill with crowds of people sipping the local Dreher beer and listening to live jazz or watching an alfresco movie on the steps leading down to the Gödör Klub, an edgy art and music venue in an abandoned parking garage. Liszt Ferenc tér, a verdant pedestrian promenade off Andrássy út, resembles Barcelona's La Rambla and buzzes with outdoor cafés filled to capacity. And on the culinary front, the city can now count a restaurant with a Michelin star: In March, Costes restaurant (no relation to the Parisian brothers' cafés and hotel) received a star from the venerable French guide. It's one of a group of celebrated local haute-cuisine spots, including Onyx and Babel and several old-school imports from Italy, that is steering local fare far away from goulash and stuffed cabbage. "Budapest is becoming more and more cosmopolitan," says Balázs Gyémánt, editor of the weekly fashion program Style on Hungary's national TV network. "People have started calling this part of the continent 'the new Europe,' which says it all. It's a vibrant city, full of energy, and sometimes quite provocative."

Budapest is by any measure a charmingly beautiful city. Livelier than Vienna and grander than Prague, the two neighboring capitals, the city of nearly 2 million people is neatly cleft in two by the Danube. Until 1873, Buda and Pest were independent towns on opposite banks of the river. (The former town of Óbuda, or Old Buda, where Roman ruins mark the spot of the first-century settlement of Aquincum, was also absorbed into the present-day metropolis.) Buda, on the Danube's western bank, is hilly, green, and medieval in feeling, with narrow multicolor houses lining cobblestone streets. Some of the city's poshest neighborhoods, including Rose Hill, crown the hillsides north and west of the river. Closer to the Danube is the Castle district, dominated by the colorful tile roof of the imposing 13th-century Gothic Matthias Church and the noble hulk of Buda Castle. Inside the old Hapsburg palace, built by Empress Maria Theresa, mother of Marie Antoinette, is the Hungarian National Gallery and its expansive collections of Hungarian art from the medieval era through the 20th century.

Pest, meanwhile, is flat as a pancake, though filled with elegant boulevards and monuments: the neoclassical Museum of Fine Arts on Heroes' Square and St. Stephen's Basilica, and the Parliament, a neo-Gothic masterpiece on the river modeled after Westminster. Pest is the city's commercial heart, from the designer boutiques of Andrássy út to the food stalls at the impeccably renovated Központi Vásárcsarnok market festooned with garlands of dried red peppers soon to be ground up into paprika, Hungary's distinctive native spice. This is the city's cultural hub too. The home of Béla Bartók and Franz Liszt has long been a center for music, and the Art Nouveau Franz Liszt Academy of Music and the impressive Italianate Hungarian State Opera House are as popular with locals as the many music festivals that have drawn international pop and rock superstars.

Budapest has always been a place of creativity and innovation. Most Hungarians will happily rattle off a list of inventions by their countrymen: the ballpoint pen (László József Bíro), silent matches (János Irinyi), the Rubik's Cube (Ernö Rubik). Budapest can also claim Europe's first electric subway, inaugurated by Emperor Franz Joseph in 1896, four years before the Paris Métro. Among Hungary's best-known progeny are designer Paul László; photographers André Kertész and László Moholy-Nagy; financier George Soros; and, of course, the Gabor sisters. Eva, Magda, and Zsa Zsa are in fact fine examples of the feisty, rebellious Hungarian character.

Hungary joined the European Union in 2004, but its switch to the euro, originally planned for 2008, has been delayed for several years due to the country's deficit and the worldwide economic slowdown. The silver lining is that the weakened national currency, the fornit, makes Budapest a shopper's delight. There are bargains to be had on everything from Herend and Zsolnay porcelain to antique furniture, especially top-notch Art Deco, Bauhaus, Biedermeier, and Secessionist pieces. Even with shipping costs added in, such antiques are often cheaper than buying from dealers back home in the States—if you can even find pieces of comparable quality. As in much of the former Eastern Bloc, a rush to shed the trappings of the Communist era meant Hungarians were quick to ditch furnishings from the 1950s, '60s, and '70s. But collectors are starting to come around to the unique, not-quite-Scandinavian look of Hungarian midcentury furniture sold at a handful of shops, including Gallery 567. The retrogroovy Menza, one of the trendiest eateries in town, might well bring the style back: Its wood paneling, floral wallpaper, and orange walls, inspired by 1970s school canteens, make a compelling case for Socialist style.

Budapest's contemporary art scene is also booming, with Hungarian galleries making inroads abroad and at major art fairs from Paris to Basel to Dubai. "The arts are very close to the Hungarian soul, and there's a long and deep history of collecting," says Dianne C. Brown, an American art consultant who moved from New York to Budapest in 1993. She now runs the studio complex Art Factory, formerly a vast Soviet factory on the outskirts of town, for promising young artists like Zsolt Bodoni. Among Bodoni's growing roster of collectors is H. Ross Perot Jr., whose Dallas penthouse includes a work by the young Hungarian. At the Mihai Nicodim Gallery in Los Angeles last summer, Bodoni displayed dark, ghostly canvases depicting statues of Stalin and other leaders being put into storage or smashed to pieces.

Hungary's Communist period isn't something all locals like to discuss with strangers; most would just as soon forget the bleak decades under Soviet domination. After the change in government in 1989, dozens of Socialist sculptures that once filled Budapest's squares and parks were literally put out to pasture, in a field alongside one of the highways out of town. Now called Szoborpark (Statue Park), it's a fascinating microcosm of a historic as well as aesthetic period. A massive pair of bronze boots atop a concrete replica of the grandstand where Communist leaders surveyed military parades once belonged to a statue of Stalin, before it was sawn off by protestors during the 1956 revolt. It's a powerful symbol of the Hungarian spirit—and of Budapest's desire to clean the slate and regain its status as the East's City of Light.

Linger over a cappuccino. The Turks first introduced Budapest to kávé, or coffee. Among the classic 19thcentury coffeehouses still serving are Gerbeaud (Vörösmarty tér 7-8; 1-429-9000) and Centrál Kávéház (Károlyi Mihály utca 9; 1-266-2110).

Központi Vásárcsarnok (Central Market Hall), Vámház körút 1-3; 1-217-6067: The city's immaculate renovated food hall is the place for edible souvenirs and the requisite sacks of both hot and sweet paprika. The folk-art vendors are upstairs.